West Japan Railway’s Earnings Upside From Larger Tourist Demand; Raising FVE to JPY 7,200 per Share

We are increasing our fair value estimate for West Japan Railway, or JRW, to JPY 7,200 per share from JPY 6,600 per share previously. Shares are trading at a minimal discount to our revised fair value estimate after incorporating better-than-expected growth in incoming tourist demand tracking around mid-6%. With revenue increasing from opening of Hokuriku Shinkansen during the year, we expect West Japan Railway to report a respectable 22% increase in net profit to JPY 105 billion for the full year ending March 2017, with results set to be released on April 27, 2017. We also do not assume any major expenditure for the rest of the year after the company completes the 70% ownership purchase of Mitsubishi Heavy Industry’s real estate division for JPY 100 billion. Looking ahead, improving free cash flow yields could provide some upside to its low dividend yields, as management has already signaled its intention to enhance total shareholder returns above a reasonably attractive 3%.